Can iPhone 5 be "gigantic" in maturing U.S. smartphone market?

Apple faces a dramatically different U.S. smartphone market for iPhone 5, expected to be announced Wednesday, than it did when it launched the first iPhone in 2007: today, roughly half of mobile users are already have smartphones.

That could mean that while iPhone 5 may be a "gigantic success around the world," it may be less than gigantic in the U.S., says Stephen Baker, director of industry analysis for The NPD Group, in a blogpost this week.

"The iPhone 5 will launch into a U.S. smartphone market with very different dynamics than the launch window of the iPhone 4 or the iPhone 4s," he writes. "And these dynamics have nothing to do with the strength of the new product offering, its hardware configuration, its marketing, or even its competition. The U.S. smartphone market appears to be an increasingly mature one."

Baker cites recent data from The NPD Group that shows the U.S. mobile market growing by "just" 9% in the second quarter, "and all of that growth was the result of increased prevalence of pre-paid devices in the market." Apple's iPhone models, including the older, lower-priced ones still on sale are not offered in the pre-paid segment.

ComScore data from June (but reported in July) show that smartphone users, as a percentage of total U.S. mobile phone users, was just under 50% and by now is over that percentage. Other comScore data show that nearly half of feature phone users who buy a new mobile phone opt for a smartphone.

"The iPhone, as well as Samsung's phones, have continued to gain brand share over the past year and their joint share now exceeds 50%, which is likely to make it more difficult for Apple to easily take share from weakened competitors, because many of the easy share gains have already been accomplished," Baker argues.

A similar dynamic is evident when comparing the market share of mobile operating systems. "On the operating system side, iOS and Android have such dominant share that, as with brands, growing faster than the market will increasingly require taking share from a much stronger competitor, as opposed to merely vanquishing those who are already falling by the wayside," Baker says.

And Apple can't look to expanding sales by adding new top-tier carriers. "Last year's iPhone 4s launch could still take advantage of selling into...the remaining huge untapped base of potential subscribers at Verizon and Sprint who were not available to them previously," Baker writes. "This year's introduction faces the specter of a much smaller base of previously unavailable consumers, based on their carrier preferences." In other words, many Verizon and Sprint customers who had wanted an iPhone have already bought the 4S within the past 12 months and are unlikely to be upgrading to the new model.

That isn't stopping T-Mobile USA. Though the carrier apparently will not be formally carrying the new iPhone, T-Mobile is stepping up efforts to attract customers with unlocked iPhones to its network, stressing its lower-cost data plans.

NPD Group's Baker emphasizes that he's not saying that "iPhone 5 will be unsuccessful." Rather, the current U.S. mobile market shows "the challenges of growing faster than the industry multiplies. Blowing away all weakened competition, as Apple has done to this point, makes it infinitely harder to continue to blow away the remainder, because they are, by virtue of their current position, much more competitive than those that have fallen by the wayside. "

Apple iPhone sales follow a cycle that includes current owners of older models, especially those at the end of their two-year cellular contracts, upgrading to a new iPhone. That's expected to continue, as the iPhone 4 was introduced in June 2010. And, as Baker suggests, Apple has taken a big chunk of users discontinuing feature phones and buying their first smartphone. In some case, such as the sharply declining share of RIM's BlackBerry phones, Apple has taken share from weaker smartphone rivals.

ComScore has recent data on the feature phone switch to smartphones, and Android's success shows the challenges Apple faces. Half of feature phone subscribers who acquired a device during April 2012 switched to a smartphone, an increase of 9.5 percentage points from the previous year. Of those making the switch, nearly two-thirds or 61.5%, opted for Google Android devices, and 25.2% for the iPhone (and 7.1% for MicrosoftWindows Phone devices).

There's a similar pattern for existing smartphone users who buy a new one. In the same comScore study, looking at June purchases in the U.S., 54.2% of existing smartphone users chose to buy an Android device, and 33.5% chose an iPhone (9.6% opted for BlackBerry, and 3% for Microsoft Windows Phone). The report doesn't explore the reasons for these buying decisions.

With the iPhone 5, Apple is expected by many analysts to support a Chinese 3G cellular standard in order to sell its phones through China Mobile, the mainland's dominant cellular carrier with over 650 million subscribers. That move underlines how important overseas markets now are to the iPhone's continued sales success.

Another possible channel for Apple to leverage is the pre-paid market, which has increasingly offered pay-as-you-go mobile users with smartphone options. Apple is expected to discontinue sales of the iPhone 3GS, first introduced in June 2009 and which is currently offered by carriers for free, with a two-year contract commitment. The iPhone 4 now sells for $99.

But, bearing in mind Baker's point about U.S. mobile subscriber growth in the prepaid market, Apple could reposition the 3GS or possibly even the iPhone 4 for those who want to avoid two-year contracts and their attendant costs.

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